Eli Broad Professor of Information Technology
Eli Broad College of Business
Michigan State University

September 03, 2009
Alter Hall 505, 1130am – 0100pm

Abstract

Vendors of Enterprise systems software (ESS) offer a portfolio of software components to support a variety of specific business functions. Client organizations construct a digital platform for their business processes by buying software components from one or more ESS firms and expect the components to be compatible with each other. Each software component (e.g., ERP, CRM, analytics) forms a market, with multiple ESS firms competing in each of those markets. As a result, the ESS industry is characterized by multimarket competition. The existing literature in strategy suggests that multimarket competition is characterized by two findings: (i) Greater multimarket contact improves firm performance because of the potential for mutual forbearance and tacit collusion (ii) Greater domain overlap exposes a firm to the whirlwinds of intense competition and adversely affects its performance. Yet, the ESS industry exhibits another unique characteristic: potential for indirect network externality. In their desire to architect seamless digital platforms, customers expect that components bought from multiple firms will integrate relatively easily and at low integration costs. Therefore, domain overlap might in fact create the potential for positive performance gains in the ESS industry. Therefore, the nature of multimarket competition in the ESS industry deserves fresh attention. We examine these competitive dynamics by analyzing data from a set of ESS firms that account for more than 95% of the revenue in this market over 3 time-periods. Our research suggests that the combination of multimarket contact and domain overlap do lead to findings that are contrary to extant research. First, our findings suggest that are no obvious benefits to simply increasing the number of component markets where an ESS firms competes. However, there is clear evidence of economies of scale and scope in expanding a functional component to serve multiple vertical industry segments. On the other hand, our research suggests that when firms strategically expand their component portfolio so as to increase their domain overlap, they show positive performance gains. We propose that the potential for indirect externality effects trumps traditional domain overlap considerations, whereby competing in markets with high overlap may actually be preferable for a firm in the ESS or digital goods industries. Thus, presence in highly competitive markets is desirable so as to be attractive to client organizations because it signals competitive strength and commitment to digital platforms. Though the impact of multimarket contact on firm performance is positive and consistent with prior findings, we find that firms are able to extract further value from their multimarket contact when they also have high a degree of market overlap thus underlining the strategic aspects to market selection. We conclude with recommendations for theory and practice.